Bsquare Corp (BSQR) 2010 Q3 法說會逐字稿

Welcome to the BSquare Corporation third quarter 2010 earnings conference call. During today's presentation all parties will be in listen-only mode. (Operator Instructions) I would now like to turn the call conference over to Mr. Scott Mahan, Chief Financial Officer of BSquare.

Good afternoon everyone. Before I begin, let me remind you that this call is being broadcast over the Internet, and that a recording of the call, and the text of our prepared remarks, will be available on our website. I would also like to direct your attention to the Safe Harbor statement contained in our press release issued today and the Safe Harbor statement posted with these prepared remarks, both of which apply to the content of this call.

All per share amounts discussed today are fully diluted numbers. With that said, let me recap our financial results. We reported total revenue this quarter up $25.3 million, up 54% from $16.4 million in the year ago quarter and down 6% from $26.9 million in Q2. A significant increase on third-party software sales accounted for the year-over-year increase whereas the decline in Ford-related service revenue drove the quarter-over-quarter decline. Excluding a $2.5 million Ford overrun adjustment which benefited Q2 this was our best top line quarter ever. Total revenue for the first nine months was $69.2 million, up 41% from $49.2 million in 2009. Sales of third-party software were $18.0 million this quarter, up 102% from $8.9 million in the year ago quarter and up 10% from $16.3 million in Q2.

Year-over-year increase was driven by 82% increase in Microsoft general embedded operating system sales and $3.1 million in the Windows Mobile operating system sales compared to none in the year ago period and $2.5 million in Q2. The year-over-year increase in general embedded sales was driven by 14% increase in our customer base and a 60% increase in average purchasing volumes. These metrics benefited from the addition of a new customers this quarter that accounted for $1.1 million in general embedded licensing sales. The quarter-over-quarter increase in third-party software sales were driven primarily by the new customer and a sequential increase in the Windows Mobile sales.

Third-party software sales were $45.4 million for the first nine months compared to $22.9 million in 2009. Proprietary software revenue was $1.1 million, up 16% compared to $947,000 in the year ago quarter and up 15% from a $952,000 in Q2. Increases in TestQuest revenue and non-TestQuest product support revenue coupled with Qualcomm Snapdragon mobile development platform, or MDP reference design sales drove the year-over-year increase. Our first sales of the MDP occurred this quarter. The quarter-over-quarter growth improvement was driven by an increase in non-TestQuest product support revenue and the MDP sales partially offset by lower TestQuest revenue.

TestQuest revenue was $403,000 this quarter compared to $273,000 in a year ago quarter and $582,000 in Q2. Proprietary software revenue was $3.0 million for the first nine months compared to $3.1 million in 2009. TestQuest revenue was $1.9 million for the first nine months compared to $1.3 million in 2009. Brian will speak to the prospects for our TestQuest products later but as we have mentioned previously, results to-date have been somewhat disappointing and if we are not able to improve our TestQuest-related cash flows, we may be faced with an impairment charge on our TestQuest intangibles which would be non-cash expense.

Service revenue was $6.2 million this quarter, down 5% compared to $6.5 million a year ago quarter and down 36% from $9.7 million in Q2. Ford-related service revenue was $2.5 million this quarter compared to $3.3 million in the year ago quarter and $6.2 million in Q2 and drove the year-over-year and quarter-over-quarter decline in total service revenue. In last quarter's call, we said that we expected Ford-related service revenue to decline sequentially by $3.9 million and total service revenue to decline by $3.5 million. Ford came in roughly $200,000 better than expected due to addition of incremental resources.

Asia service revenue of $960,000 represented our best performance there in over seven years, driven by significant customer projects in Japan, and was up 79% year-over-year and 216% quarter-over-quarter. We did experience a sequential decline in our North American service book of business outside of Ford coming off our first sequential increase in two years in Q2. But much of this was timing related and we are expecting a healthy sequential increase in Q4. Total service revenue was $20.8 million for the first nine months compared to $23.2 million in 2009. Ford-related service was $11.0 million for the first nine months compared to $13.7 million in 2009.

Turning to gross profit margin, overall gross profit was $5.0 million this quarter or 20% of total revenue as compared to $3.4 million or 21% of revenue in the year ago quarter and $7.8 million or 29% of revenue in Q2. Year-over-year increase in overall gross profit was primarily driven by incremental third-party software contribution of $1.1 million. The quarter-over-quarter decline in overall gross profit was driven by $2.9 million or $0.28 per share in Ford-related effects that benefited Q2 without which total gross profit would have been $4.9 million or 20% of revenue. Specifically, $2.5 million in service revenue recognized in Q2 when we signed the Ford contract amendment pertained to project overruns occurred in Q1 and Q2 also included the reversal of a $390,000 loss contract accrual established in Q1.

Third-party software margin was 15% this quarter compared to 17% in the year ago quarter and 15% in Q2. Proprietary software gross margin was 83% this quarter compared to 84% in the year ago quarter and 85% in Q2. Service margin was 24% this quarter compared to 17% in the year ago quarter and 47% in Q2. The year-over-year improvement in service margin was due to the year ago quarter being negatively impacted by project overruns on the main Ford program. Quarter-over-quarter decline in service margin had to do with the Ford effect I just described which benefited Q2. If you normalize for these effects, Q2 service margin was 23%. Unanticipated bonus expense negatively impacted the quarter such that without this expense, service margin would have run 20%. Overall gross profit was $14.0 million or 20% of total revenue for the first nine months compared to $12.2 million or 25% of total revenue in 2009.

Moving down to P&L, operating expenses were $4.0 million for the quarter compared to $3.3 million in the year ago quarter and $3.8 million in Q2. The prior-year benefited from the reversal of an accrued legal fees liability in the amount of $534,000 or $0.05 per share without which OpEx would have been $3.9 million. The remainder of the year-over-year increase relates to the accrual of year-end bonuses in the amount of $253,000. The total bonus expense including the amount which impacted service cost of sales was $330,000 or $0.03 per share and there was no similar expense in the year ago quarter or Q2. This bonus expense drove the quarter-over-quarter increase in OpEx as well. Total OpEx was $11.9 million for the first nine months as compared to $12.0 million in 2009.

Now I will speak to our bottom line results. We reported net income for the quarter of $936,000 or $0.09 per share, up from $71,000 or $0.01 a share in the year ago quarter and down from $4.0 million or $0.39 per share in Q2. The year ago quarter benefited from the legal liability reversal of $534,000 or $0.05 per share whereas Q2 benefited by $2.9 million or $0.28 per share from the Ford-related effects that I discussed previously such that normalized Q2 net income would've been $1.1 million or $0.11 per share. For the first nine months, we reported net income of $1.5 million or $0.14 per share compared to net income of $329,000 or $0.03 per share in 2009. We generated EBITDA of $1.5 million this quarter or $0.14 per share compared to $477,000 or $0.05 per share in the year ago quarter and $4.3 million or $0.42 per share in Q2.

Adjusting for the Ford-related effects which benefited Q2, normalized Q2 EBITDA was $1.5 million or $0.14 per share which was flat compared to the current quarter but as I mentioned earlier this quarter included a bonus expense in the amount of $330,000 of which $170,000 or $0.02 per share was not added back for EBITDA purposes while the remainder had stock comp expense. We generated EBITDA from $3.4 million or $0.33 per share for the first nine months compared to $1.5 million or $0.15 per share in the prior year.

Cash and investments increased $4.3 million to $21.5 million at quarter end largely as a result of collecting significant Ford receivables invoiced just prior to June 30. The September 30 cash and investments balance include $875,000 of restricted cash and $828,000 of auction rate securities both classified as long term. The auction rate amount is net of evaluation allowance of $522,000. On last quarter's call, we said we expect cash and investments increased to $20.5 million at quarter-end. Stronger-than-expected sales and a reduction in DSOs accounted for the higher than expected quarter-end balance.

CapEx was $49,000 quarter and $129,000 on a year-to-date basis. We currently expect full year CapEx to come in a $200,000 to $250,000. We currently expect total cash and investments to increase by $1.0 million to $1.3 million in Q4. Headcount including contractors is currently 263 compared to 252 as of the date of our last call. Engineering services headcount is currently 171, up from 164. Now I'd like to turn the call over to Brian Crowley, BSquare's Chief Executive Officer.

Thanks Scott. Today I will provide my perspective on our Q3 results, update you on our key initiatives and then discuss our outlook for Q4. I will start with services by saying that I am pleased with our overall service results for Q3. Most significantly we completed the original Ford contract on August 11, and have moved the development team into the Ford Competency Center. The team is now focused on new featured development under the direction of Ford. Our relationship with Ford is good, and the Competency Center has brought stability to our service results as the Competency Center, business model eliminates the overrun risk we previously experienced. Our Competency Center agreement with Ford runs through July 2011 and we hope to renew the agreement at that time.

Outside of Ford, we made several -- we made positive progress in several areas. Our Asia team is working on several Windows CE, Windows Mobile and Adobe Flash projects which drove the strong results and good margins out of Asia during the quarter. We have an initiative to expand our work on the Android platform and have been steadily growing our Android experience in revenue. In fact, we are currently delivering on six Android projects and we believe we are rapidly growing our reputation for quality delivery on that platform.

While the majority of our service revenue today still comes from embedded Windows projects, over time we seek to have a more balanced portfolio of Windows Embedded and Android projects. Another initiative we have been driving over the past two years involves expanding our customer base by building an applications development team to create applications and user interfaces for our customers. We have had good success with this initiative and other applications development team is now a single largest team inside our service organization which reflects the growing number of application development projects that we are delivering.

Turning to proprietary products, we did see a slight sequential increase in proprietary product revenue. TestQuest product sales came in lower than expectation due to a couple of large opportunities that moved out of the quarter. We have learned over the last year that the TestQuest sales cycle is long and the revenue results can be lumpy. One or two large opportunities can move out of the quarter and make it difficult to backfill those opportunities due to the length of the sales cycle. We are attempting to create a TestQuest revenue breakout through our Handset Certification Platform efforts as I will discuss in a moment.

In parallel with the Handset Certification Platform efforts, we continue to sell TestQuest to our traditional customer base and will continue to work to increase sales into the space. Our Texas Instruments OMAP-related revenue was flat from Q2. At this point we have completely ramped down the investment in our OMAP Windows CE and Windows Mobile Board support packages or BSPs and have moved both products into harvest mode. We expect that OMAP-related revenue will slowly grow as more devices ship using our BSPs. We also continue to earn revenue from a variety of other sources including our legacy SDIO and Schema products as well as sales of Qualcomm's Snapdragon Mobile development platform. We expect that those product revenues will continue generally at current levels for the next year.

Our third-party software sales turned in a fantastic quarter driving very good growth in sales of both Windows Embedded and Windows Mobile products. There is no single reason that accounts for growth in third-party software sales. We attribute this growth to a combination of improved economic conditions, improvements in our sales channels and structural channel changes that microsoft has made that have resulted in additional customers coming to the embedded sales channel to purchase certain microsoft products.

Outside of Microsoft products we continue to see steady demand for Adobe Flash licenses and growing demand for McAfee Solidcore security products. We expect that Adobe Flash license sales will tail off over the next year as Adobe makes progress in their Open Screen Project initiative. We expect that McAfee Solidcore license sales will continue to slowly increase for the foreseeable future. We turned in another solid quarter selling Windows Mobile licenses and through the third quarter have sold a 6.8 million of Windows Mobile licenses worldwide and expect to finish the year close to the top end of the $5 million to $10 million range of incremental Windows Mobile revenue that we provided at the beginning of the year.

Next, let me discuss our key growth initiatives. To remind you, we have three primary growth initiatives. First, we are expanding our footprint in Asia in order to capture additional business. Second, we are looking to expand the territories we sell our third-party products into as well as the number of third-party products that we sell and finally, we are working to expand our proprietary IP portfolio. I will start with our progress in Asia. There's a tremendous amount of innovation and activity in the smart device world taking place in Asia today and in order for BSquare to continue going we need to be present in that territory in a more significant way. Through the first three quarters of 2010 only 14% of our revenue was earned from customers outside of North America, the vast majority of that coming from Asia. Our long-term goal over the next several years is to earn closer to 40% or 50% of our revenue outside of North America.

Therefore, we have two initiatives underway in Asia. First, we are expanding our sales channel. Today, our Asia sales are focused primarily on Taipei, Tokyo, and Beijing we know we're missing out on business in Korea and other areas of China outside of Beijing because we do not have local representation or because our current sales staff is bandwidth constrained. We have recently added two new sales people in Korea and are in the process of adding up to five additional sales people in various locations around China.

Adding sales capacity will bring business in the door but we must be able to deliver on that business, therefore we are in the process of ramping up our Asia engineering team. We have added additional engineers to our Taiwan engineering team and at some point, most likely in early to mid-2011 we expect to establish a China-based development center. Building out our Asia engineering team will have an important benefit for our North America service revenue in that we can utilize our Asia teams in conjunction our the North America team to deliver North America service projects at lower costs but higher margins by blending delivery out of higher and lower cost locations. Historically, our North America service prices had been higher than many of our larger competitors due to the fact that we have almost always delivered our North America services using North American resources.

We have tracked considerable business that we have lost due to price and we believe that if we can profitably (inaudible) business at a price 20% to 30% lower than our typical rates, our addressable market would be considerably larger. This is particularly important as we continue expansion of our applications team as the applications development market is price sensitive with many Indian consulting firms offering their services at competitive rates. Therefore, in parallel with building up our Asia engineering capacity, we are upgrading our internal systems and processes to allow us to manage and deliver these blended programs very efficiently. We do not expect to reduce the size of our North America delivery organization.

Rather, we think the opposite will happen. That with more competitive pricing and the added service capabilities I just discussed, we should win incremental business that will drive the need for additional North America engineering capacity. With the implementation of a blended delivery model in 2011, we expect growth in our service revenue during the year and at the same time we believe that the blended delivery model will allow us to drive our service gross margin into the mid-30% range by end of the year.

Our growth strategy around third-party products is quite straightforward. We are working with partners to expand the territories in which we are able to sell their products and we're looking for additional products to sell. For example, today we are authorized to sell the Microsoft Embedded products only in North America but we would like to sell these products worldwide and we are working towards that goal. We also created a new position within the Company to focus on listening to product requests coming from our customers and then searching for products that fulfill those requests either by setting up resell agreements or by turning the request over to our products team to determine if it makes sense for us to invest in creating that product.

As you see from the results we announced today, third-party product sales are driving our revenue growth. While the blended margins from third-party sales is relatively low, we have always been able to sell our third-party products efficiently and profitably. We believe that adding additional territories and products to our third-party portfolio will drive incremental revenue and profit on a consistent basis. Third-party products also add to the overall solution bundle that we are offering to our customers. I like to think of it this way, if a customer needs 50 pieces of software to make their device, we want to be able to offer them all 50 pieces plus high-quality services to tie the solution together. The more products that we have to offer our customers through all phases of their device development, the stickier we become with that customer and the more likely we are to have an extended relationship with that customer.

Finally, let me update you on our products initiative and our TestQuest Handset Certification Platform. First, let me say how happy I am to have John Traynor join BSquare as our Vice President of Products. John brings a great technology and business background to our Company and is already having a positive impact. I have asked John to focus on two key initiatives. First, we seek to become more nimble and cost effective in finding and acting on product opportunities and John is working on building a quick turn development process that I hope to talk more about in future quarters. The second initiative is to drive the TestQuest Handset Certification Platform that we announced early in the quarter.

The Handset Certification Platform allows a mobile operator to develop, manage, and publish portfolios of test cases to multiple smartphone OEMs and enables OEMs to pre-certify devices before they are submitted to the mobile operators device certification centers. Optionally, BSquare will develop and maintain a test case portfolio for the mobile operator. The complete cycle from test development, distribution testing and mobile operator certification is automated, secure, and auditable. We believe that this product will give both mobile operators and smartphone OEMs a valuable tool to ensure incoming device quality and reduce the cycle time to bring new devices to market.

From a business perspective, the Handset Certification Platform moves us from selling TestQuest licenses to individual OEM or enterprises for around $40,000 to $60,000 per sale to selling strategic distribution solutions to mobile operators and their OEMs with potential million dollar plus multi-year revenue streams. There are over 900 mobile operators worldwide with the largest 30 mobile operators representing over three billion subscribers. This is a large potential market that we are selling this product into.

Of course, as I mentioned earlier we will continue to sell TestQuest into our traditional OEM and enterprise customer base and do not intend to back off driving revenue from these customers. As I mentioned last quarter, we are currently working on a Handset Certification Platform opportunity at a major Asian mobile operator and entering discussions with a North American and European mobile operator, both of whom have discussed interest in our solutions.

As I said last quarter that I thought we had a good chance of closing our first Handset Certification Platform sale in the fourth quarter and given the progress we have made, that opportunity still exists. One caution. Even if we're successful in closing our first sale in Q4 due to the implementations that are required, we will not begin to see meaningful revenue until 2011. I will finish our call today with expectations for the fourth quarter. Based on our current outlook we expect that revenue from our third-party software, proprietary software and engineering services will all be up sequentially. As we mentioned in our press release, we expect total revenue to come in the range of $26 million to $28 million. We expect that our total gross margins will improve driven by improvements in our service margin.

We expect improved profitability in Q4 and find that we expect to increase our cash and investments by $1 million to $1.3 million in the quarter. Obviously, these expectations are based on our current forecasts which are subject to change and the potential impairment charge of our TestQuest assets that got discussed earlier. We have been asked the question by investors, is the revenue level you have been showing since Q2 and the resulting probability there from a new baseline from which expect to grow? The short answer is yes.

We believe that subject to any major changes in strategy by our partners, changes in the economy and the other risk factors that we list in our filings, this level of business is sustainable and we believe that we can show incremental revenue and profitability growth on top of this baseline. Certainly to sustain and build on this global business, we will be making investments that will add to our current expense run rate. As always, we seek to make measured and prudent investments and our aim is to always remain profitable by we grow the overall business.

One final thought. We have not previously provided guidance at this level of detail but are doing so this quarter partly because we feel our visibility in the fourth quarter is particularly clear and we feel the information will be helpful to investors. We expect to continue to provide [similar] types of guidance in the future when we have sufficient clarity to do so. But there may be many factors that could lead to a decision to exclude all guidance or particular types of guidance depending on the information we have on hand at the time of our earnings announcement. With that, I will wrap up. Thank you for attending our call today. This ends the prepared portion of our call. We will now open up the call for questions.

(Operator Instructions) Our first question comes of the light of Don [Sankemp] with PSC. Please go ahead.

Yes, congratulations to everyone. I have never seen such a vast ramp-up in sales and profits, and I want to thank Brett Maas for introducing me to BSquare. And a lot of my friends and customers that have invested. I have one question. I would like for you to give one minute dissertation on how to engineer uses the handheld device. What does he ask the computer? What does he get back. How does -- how is it used? What does he do? I do not understand how it's helpful. I know what Windows is, but tell me what they typically do. Thank you.

Yes, Don. Are you talking about a typical handheld device or are you asking a question about our Handset Certification Platform?

Physical.

A typical device is used, we get involved in many different devices all the way from smartphones through handheld terminals that are used in industrial. I am seeing a Federal Express truck outside our office. He has a handheld device that he gets shipping information from all the way to inside the vehicle in vending machines like our Ford and Coke customers that we have talked about.

What do they get and what do they get out?

That it really depends on the application. Every application is different.

You've got lots of different applications than?

Yes, there is not any one answer to that question.

Okay. How many people at Ford use the systems?

How many customers does Ford have for their vehicles?

Yes.

The way to look at that is the Ford system is shipping on the MKX and the Ford Edge and the Ford Explorer and when Ford reports results for those vehicle lines you can see how many users there are. It's not something that we can say.

They won't let you?

I'm sorry but I didn't hear what you said, Don.

They will not let you say how many?

We don't know.

I see.

Even if we do know it's not something that we could disclose.

Okay. Thank you.

Yes. Thank you.

(Operator Instructions) Our next question comes from the line of Sarkus Sherbetchyan with B. Riley.

Congratulations on the quarter.

Thank you.

A couple of questions here. Just to confirm, in the November investor presentation on slide 16 you had the growth opportunity. I noticed that the expectation for margin improvements are pretty compelling and I just want to understand, is the $40 million in sales opportunities incremental to your baseline today?

Yes we think that is incremental to the run rate that we are on now.

Okay. And to get to that growth rate what types of investments would you have to make in sales and marketing or any other OpEx in order to make that happen? Can you maybe quantify that?

Hard to quantify this one. I talked about some of the sales investments we are making over in Asia right now. That is obviously a big part of it. As we expand the territories, I talked about expansion of territories today. That is obviously going to require us to set up additional systems, maybe some additional offices, some additional sales heads in different regions of the world as we expand our territories. And then potentially as we grow our engineering offices there is a ramp-up in training time for these engineers.

We bring engineers on and typically they go through a training and ramp-up period that is four to six months before they really become fully utilized and fully billable to a customer. Not always but in general they don't just hit the ground running on day one. But except for what we talked about as far as headcount in growing Asia right now we have not disclosed any of the other -- we have not quantified, I should say, any of the expenses at this point. Do you want to add to that, Scott?

Well thank you for that color. That definitely does help. And along the lines of the TestQuest Certification program, it looks like you're gaining interest and traction definitely. Do you have a timeframe as to when you would expect to win your first customer?

Yes we are hoping to win our first customer in Q4.

Okay.

Remember to a point Brian made in the prepared remarks, the way this business model works is we closed with the mobile network operator first and then it becomes part of -- it becomes a requirement of their OEM and their ODM suppliers and that's where we're generating revenue from so closing the carrier in Q4 means revenue in 2011.

Closing a mobile network operators is just a first step in the process but it is the key step.

Right. So let's say if we do close the deal in Q4 basically the sales will materialize pretty much sometime in 2011 and hopefully beyond, right?

That is the idea.

Perfect. We have been seeing iPads and Androids appear in -- I guess in some salespersons hands nowadays and essentially there is some great opportunities to have these types of tablets and like devices in different parts of the business organization. It looks like it's actually [disruptive] type of technology. Do you have anything as far as app development or any other type of work that you are doing on these Android tablets or such devices?

We are doing -- actually in our service organization, we are doing a fair amount of app development on Android devices. We do not have any products today around Android could we hope to develop some in the future. Right now, the service opportunity appears to be quite robust around Android. Also I should mention, thank you Scott, our TestQuest product does support Android and quite a few of the TestQuest opportunities we are working on are Android-related.

Great. Thank you very much. Good luck guys.

Thank you.

(Operator Instructions) Our next question comes from the line of David Mau with Montgomery Street Research.

Good afternoon and congratulations gentlemen on a great quarter.

Thank you very much.

I guess I have a follow-up question on gross margin in the fourth quarter. Knowing that you don't say anything in your guidance about the blend of business between third-party software and services. I just wondering if you might add some color to that because there are some different gross margin rates there?

We are not providing any more detailed guidance right now than the combined $26 million to $28 million that we provided other than we did say they would all be up.

Okay. Very good. Very good. I guess my next question has to do with the TestQuest Certification program. I probably missed past conversations about that. But is it -- correct me if I am wrong here. You sell a certification program to a wireless operator to certify handsets from various manufacturers. Is the sales of software to those manufacturers licensed only for the work that they are doing with that particular carrier? Or I guess I should maybe say -- how would I say this differently? If you have sales or multiple customers that are different carriers, does that multiply the number of licenses or I guess could be as the royalties that you could get from different manufacturing organizations?

Yes, I understand what you are saying. We do this as a subscription model in that we implement the Handset Certification Platform for a mobile network operator. They in turn require their OEM to connect to the platform and pre-test and pre-certify the handsets before they go to the mobile network operator. And they pay us a yearly subscription in order to use that service. And so if an OEM -- if we felt there were multiple network operators, an OEM would pay us for each separate mobile operator. But the value is really not so much in the platform but in the automation of the test and each mobile network operator has their own proprietary set of test suites that they would want automated.

Okay. And then secondly, is the opportunity larger on the operator side or on the manufacturer side for the handsets?

Well, we don't expect we're going to generate really any revenue or minimum revenue from the operator. We're going to generate it all from the handset guys.

Perfect.

We're going to give the product to the operator for free and automate their tests for free.

And one point here is that this business model that Brian described isn't without precedent. There are other analogs in the industry where mobile network operators are requiring their OEM suppliers to use the software services provided by someone like BSquare.

Okay. Very good. Thank you very much and congratulations again.

Thank you.

(Operator Instructions) Our next question comes from the line of Ryan Vardeman with Palogic Capital. Please go ahead.

Hey guys congratulations on a great quarter.

Thanks, Ryan.

The services pipeline, how does that -- what does it look like as relates to operating systems Windows versus other or is that even a relevant metric to you guys?

It is a relevant metric, Ryan. I just don't happen to have it off the top of my head. All I will tell you is that we have been chasing a balance of opportunities between Windows and primarily Android. I just don't know where the pipeline fits between the two.

Ryan, the bid activity on the Android side is up significantly.

Yes. The bid activity is strong I just do not know relative to each other how they fit today.

Okay. And then as relates to new third-party products that you are looking to potentially sell how many different vendors are represented there?

Right now we are in discussions with about five different vendors at this point on new products.

Oh, wow. Are some of those quite different than some of the products you currently are selling?

Yes, if you look at the products today, obviously the bulk of it is Microsoft operating systems. And then we have got the McAfee Security product and the Datalight flash file system product and Adobe Flash. And so we are looking at products that are related to web browsing and we are looking at products that are related to an device management. So some different categories where we are hearing customers say we have a need in this area and we would like to get our software from one person or one company.

Okay. And then as it relates to auction rate securities litigation is there any -- I guess there's probably no update there but is there any?

No, Ryan. This is Scott. There are no updates. We're still looking probably -- we do not even have an official date of arbitration yet. We still expect it to be a mid-2011 timeframe. And as I mentioned we are sitting on a little over $800,000 of auction ates right now and which is representing our par value of $1.35 million subject to market conditions. I would not be surprised to see us liquidate about $850,000 out of the $1.35 million in Q4. But we do not expect to take any significant realized losses as a result.

Okay. And just as a reminder, what are the cumulative losses that you had taken previously? I guess --

They are a little under -- running through the P&L, it's a little under $550,000.

Oh, okay. All right. Thank you all very much and keep up the great work.

Actually, Ryan. Hold on. $550,000 this year and there was an additional $380,000 back in about two years ago.

Okay. All right. Thank you.

Thanks, Ryan.

Management, I show no further questions in queue.

Okay. Thank you very much everybody for your interest. We will look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes the BSquare Corporation third quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.